Teradata Corp. (TDC) reported second quarter 2011 earnings of 57 cents per share, beating the Zacks Consensus Estimate by a nickel. Earnings per share (EPS), including stock-based compensation of 3 cents, grew 29.5% from 44 cents per share in the year-ago quarter.
Based on the strong quarterly result, Teradata raised its fiscal 2011 revenue and EPS outlook.
Operating Performance
Gross profit was $328.0 million, up 22.4% year over year from $268.0 million in the prior-year quarter. Gross margin decreased 50 basis points (bps) to 56.5% in the quarter. The decrease in gross margin was due to lower services margins, arising from the higher mix of low margin Consulting Services revenue compared to higher margin maintenance services revenue.
Operating expenses were $181.0 million, up 11.7% year over year from $162.0 million in the prior-year quarter. The year-over-year increase was attributable to higher selling, general and administrative expense (SG&A), which increased 31.0% year over year to $165.0 million. Research and development expense increased 13.9% year over year to $41.0 million.
The year-over-year increase in SG&A was primarily driven by higher expenses related to Aprimo and Aster Data, higher selling expense from the increased number of sales territories, higher variable expense and foreign currency impact.
Despite higher operating expenses, non-GAAP operating income increased 27.4% year over year to $135.0 million in the quarter. Operating margin came in at 23.2%, up 60 bps year over year based on strong revenue growth in the quarter.
Net Income was $98.3 million, up 31.6% from $74.7 million in the prior-year quarter.
Revenue
Revenue increased 23.6% year over year to $581.0 million. This was driven by a year-over-year growth of 21.0% in Product revenue (software and hardware) to $269.0 million and a 26.0% year-over-year growth in Services revenue.
The strong year over year growth was driven by strong performances from the financial services and retail industries.
Region wise, Teradata achieved strong growth from the Americas in the quarter. Revenue increased 21.0% year over year to $339.0 million on a reported basis. The Americas contributed 58.3% of the total revenue in the quarter.
Teradata witnessed 34.0% year-over-year growth in the Europe, Middle East and Africa (EMEA) region to $145.0 million, while Asia-Pacific/Japan revenue increased 20.0% year over year to $97.0 million.
Balance Sheet and Cash Flow
Teradata exited the quarter with $682.0 million in cash versus $778.0 million in the previous quarter. As of June 30, 2011, Teradata had long-term debt of $295.0 million.
During the quarter, Teradata generated $179.0 million of cash from operating activities versus $106.0 million in the previous quarter. Capital expenditures in the quarter were $33 million versus $27 million in the previous quarter. This resulted in a free cash flow of $146 million versus $79 million in the previous quarter.
Teradata repurchased 720,000 shares in the second quarter for approximately $38.0 million. The company has approximately $155.0 million remaining under its existing share buy back authorization.
Outlook
For fiscal 2011, Teradata expects year-over-year revenue growth of 18.0% to 20.0% (up from the previous guidance of 14.0% to 16.0%). EPS is expected in the range of $2.20 to $2.28 (up from previous guidance of $2.13 to $2.23). The Zacks Consensus Estimate was pegged at $2.08 per share for fiscal 2011 at the time the company reported results.
Teradata expects to witness higher selling expense for 2011, as the company continues to add more sales territories to expand its customer base. Teradata expects to double the number of sales territories added in 2011. The company now expects to add 60 sales territories versus prior estimate of 30.
However, this added investment in the new territories will generate incremental operating expenses in the second half of 2011 and in 2012. This will have a negative impact on operating margin for this period. However, Teradata expects these additional investments will drive revenue and operating income for 2013 and beyond.
For 2011, Teradata expects R&D expenses in the range of $165 million to $170 million including Aprimo and Aster Data.
Recommendation
We maintain our Neutral recommendation on the stock over the long term (6-12 months) due to a weak revenue mix and increasing competition from major players such as Oracle Corp. (ORCL) and Netezza Corp. (NZ).
Currently, Teradata has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).
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